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Should Pfizer Buy Eli Lilly?

On the heels of its failed courtship of AstraZeneca (NYSE: AZN) , Pfizer (NYSE: PFE) may want to turn its attention to Eli Lilly (NYSE: LLY) -- another drugmaker with proven diabetes treatments and promising oncology drugs.

Pfizer was ready to pay $118 billion for AstraZeneca, but it might win Lilly for less.

What Pfizer wantsAstraZeneca's attractiveness stemmed from its established diabetes franchise and its potential new cancer drugs.

In December, AstraZeneca acquired the half of its diabetes partnership it didn't own from Bristol-Myers Squibb, agreeing to pay nearly $2.7 billion up front and future milestone and royalty payments in exchange for full control of Onglyza, Atacand, Byetta, and Bydureon.

In addition to the $1 billion a year diabetes business, Pfizer was also intrigued by AstraZeneca's oncology portfolio.

AstraZeneca already markets five oncology drugs that generate a combined $750 million in quarterly sales. Those sales could climb substantially if AstraZeneca's oncology research results in approvals. The company's cancer drug pipeline includes ovarian cancer treatment olaparib and PD-L1 drug MEDI4736, two products that if approved may eventually combine to generate billions of dollars a year in peak sales.

What Lilly deliversLIke AstraZeneca, Eli Lilly boasts a proven stable of diabetes drugs that includes top-selling insulin Humalog, which posted sales of more than $2.6 billion last year, up 9% from 2012. Lilly also markets the diabetes drug Humulin, which generated $1.3 billion in sales during 2013.

Lilly's pipeline also includes additional promising diabetes drugs such as dulaglutide and empagliflozin.

Dulaglutide is a GLP-1 diabetes drug that is being reviewed for approval by the FDA. If approved, dulaglutide will face off against Novo Nordisk's blockbuster Victoza and AstraZeneca's top-selling Bydureon and Byetta. Empagliflozin is a SGLT-2-targeting diabetes drug that will likely be resubmitted for approval soon given that FDA concerns over Lilly's partner Boehringer's manufacturing plant have been addressed. If approved, empagliflozin would compete for share against Johnson & Johnson's Invokana and AstraZeneca's Farxiga.

Source: Eli Lilly.

Lilly also markets proven cancer drugs such as Alimta, a lung cancer therapy that posted sales of $2.7 billion in 2013, up 4% from 2012. And Lilly's drug pipeline just notched FDA approval of gastric cancer drug Cyramza, which may also have potential in lung cancer. Lilly also has necitumumab in phase 3 trials for non-small cell lung cancer and 14 ongoing phase 2 cancer programs.

In addition, if Pfizer were to acquire Lilly it would get its hands on the blockbuster osteoporosis drug Forteo, ADHD drug Strattera, and cardiovascular drug Effient. Strattera and Effient both posted double-digit sales growth last year, respectively climbing to $709 million and $509 million. Pfizer would also gain Lilly drugs in phase 3 trials for rheumatoid arthritis, psoriasis, lupus, and pain. Of course, Lilly wouldn't give Pfizer the benefit of the tax inversion that Astra would have -- something which many argued was a big part of the premium Pfizer was willing to pay.

Fool-worthy final thoughtsAstraZeneca's goal of $45 billion a year in annual sales, 75% more than it's generating today, would go a long way to justifying Pfizer's nine-figure offer price. However, hitting that sales target requires a lot of things to go right, which is particularly difficult in oncology, where more than 90% of drugs in trials fail to reach the market.

Pfizer was willing to pay 4.7 times AstraZeneca's current sales to capture that potential opportunity (and risk). Since Lilly's market cap stands at $63 billion, Pfizer could potentially buy the company for less than it offered AstraZeneca (which has a market cap of over $90 billion), but that doesn't mean it will happen. Pfizer may simply not be interested in buying Lilly -- it doesn't have AstraZeneca's tax benefit, and the pipeline is materially different. And Lilly may be just as reticent to sell as AstraZeneca, but Pfizer won't know if it doesn't ask.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients do not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.
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